Hedge funds to see increased role in Europe’s bond market

Buy-side companies with less regulatory constraints could see a greater role in market making.

Hedge funds and other independent market makers could see an increased role in Europe’s fixed income market, as banks look to pull back as liquidity providers.

According to a new report from the International Capital Markets Association (ICMA), hedge funds are looking to adapt to the new fixed income landscape and could see a role as price makers.

“While traditional buy-siders will most likely not step in as ‘prime makers’ on central limit order books (CLOBs) or other agency-only trading venues, hedge funds may step in and provide larger illiquid pricing, bolstering liquidity,” the report says.

“This is because hedge funds do not have the same legal structure and mandates that asset managers do.”

Last year, Chicago-based hedge fund giant Citadel launched a European fixed income market-making business in a bid to broaden its European trading business.

The report added independent market makers could emerge as a result of stricter regulations on banks, which will focus on market making in specialised sectors.

“Less expensive, improved and widely used technology will help to facilitate these market making firms as advanced technology is lowering the barrier to entry.”

The report also identifies other sell-side firms consolidating their business, relying on reduced trading and using electronic trading platforms to reach more investors.

Last month, KCG announced the launch of a liquidity seeking algorithm for European clients as it looks to expand its client execution business and attract additional institutional investors.

Mifid II, set to come into effect in January 2018, will force fixed income trading from bilateral markets onto more transparent trading venues.